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Published February 09, 2023
A weekly look at issues facing Wyoming business owners and entrepreneurs from the Wyoming Small Business Development Center (SBDC) Network, a collection of business assistance programs at the University of Wyoming.
By Steen Stovall, regional director (Converse, Natrona, Niobrara and Platte counties), Wyoming SBDC Network
Obtaining startup funding for a small business can be particularly elusive, as most traditional business loans require one or more years in business. But that doesn’t mean it’s impossible.
There are a wide variety of funding options available to small-business owners. Here is an overview of seven popular funding solutions with business pros and cons for each.
-- Self-funding. This method uses personal savings or assets to start and grow a business. The pros include control, flexibility, no debt, no dilution of ownership and no outside influence. The cons are limited funds, risk, limited expertise, slow growth and personal finances.
-- Business term loans. These are traditional loans that are typically offered by banks and other financial institutions. They are usually used for specific expenses such as equipment purchases or real estate. The pros are access to capital for growth and expansion; ability to finance large purchases and investments; potential to increase revenue and profitability; and improved cash flow management. The cons are a repayment obligation with interest; potential impact on personal credit scores; risk of loan default and loss of collateral; and possible strict loan conditions and requirements.
-- Business lines of credit. These are similar to credit cards and can be used for ongoing expenses such as inventory or working capital. The pros are flexibility in use and repayments; easy access to funds as needed; potential to improve cash flow management; and lower interest rates compared to credit cards. The cons are ongoing interest and fees charged on unused credit; possible requirement of collateral or personal guarantee; potential impact on personal credit scores; and repayment obligation and impact on credit use ratio.
-- Business credit cards. This method involves obtaining a credit line specifically for business expenses. The pros are convenient access to funds for small purchases and expenses; potential rewards and benefits such as cash back, points or discounts; the ability to separate personal and business expenses; and improving business credit history and score. The cons are ongoing interest and fees charged on unused credit; possible requirement of collateral or personal guarantee; potential impact on personal credit score; and repayment obligation and impact on credit use ratio.
-- Invoice financing. This type of financing allows a business to borrow money based on its outstanding invoices. The pros are quick access to cash tied up in unpaid invoices; no need to wait for customer payments to maintain cash flow; the ability to grow business and take on new projects without cash flow constraints; and the potential to improve relations with suppliers and partners. The cons are invoice financing is costly compared to traditional loans with fees and interest; possible loss of control over debt collection and customer relationships; the possibility of reducing profit margins due to financing fees; and a business may need to provide detailed financial information and invoices for approval.
-- Angel investors or venture capital. This is when an individual or firm invests in a business in exchange for equity. The pros include access to large amounts of capital for growth and expansion; the ability to bring in experienced mentors and industry expertise; potential for network and strategic partnerships; and increased visibility and credibility for the business. The cons are loss of control and decision-making power; potential dilution of ownership and equity; strict investment terms and conditions; and businesses are required to give up a portion of future profits and potential exit strategies.
-- Crowdfunding. This method involves raising funds by appealing to a large number of people for small contributions. The pros are access to a large pool of potential investors; the ability to validate and gauge market interest in a product or idea; increased visibility and exposure for the business; and provides an option to raise funds without giving up equity or control. Cons are competition for attention and funding among many campaigns; possible limited reach and potential investor pool; the potential for campaigns to fall short of funding goals; and possible restrictions on the use of funds raised and requirements for reporting and accountability.
The key to success is preparation. Be sure you have developed a thorough business plan and firm cash flow projections that lay out the payoff for potential investors or lenders. The Wyoming SBDC Network is the best resource to help small businesses develop these key components. With eight offices around the state, the Wyoming SBDC Network provides no-cost consulting from knowledgeable experts who can assist small businesses with developing effective financing proposals.
If you’d like to learn more about how to determine the amount of money that is needed to meet your business goals and your best funding options -- loans, equity or a combination -- contact your Wyoming SBDC Network adviser.
The Wyoming SBDC Network offers no-cost advising and technical assistance to help Wyoming entrepreneurs think about, launch, grow, reinvent or exit their business. In 2022, the Wyoming SBDC Network helped Wyoming entrepreneurs start 68 new businesses; support 2,411 jobs; and bring a capital impact of $5.3 million to the state. The Wyoming SBDC Network is hosted by UW with state funds from the Wyoming Business Council and funded, in part, through a cooperative agreement with the U.S. Small Business Administration.
To ask a question, call 1-800-348-5194, email firstname.lastname@example.org, or write Dept. 3922, 1000 E. University Ave., Laramie, WY 82071-3922.